HP: Big shareholders like merger

While declining to predict victory in the hotly contested struggle over its proposed merger with Compaq Computer, Hewlett-Packard director Phil Condit said HP is gaining the support of the majority of its largest shareholders.

"We believe we have the support of most of our top 20 shareholders," Condit said in a Monday conference call with reporters and financial analysts. "Some have done their analysis and have arrived at a conclusion, others are watching what both sides are saying and will make their decision late in the process. But in our discussions with management (who have met with investors), it's very promising and very positive."

HP shareholders are set to vote on the $22 billion deal--one of the largest in technology history--on March 19, and at this point things are so close the outcome is anyone's guess.

Walter Hewlett took issue with Condit's assessment.

"Based on our conversations with the top 20 investors, HP's comment is
absolutely false," Hewlett said in a statement. Hewlett added that Wells Fargo is the latest to oppose the deal, joining Calpers and the Ontario Teachers Pension Plan Board. Wells Fargo holds around 6.8 million HP shares.

Both Condit and fellow director Sam Ginn again raised the prospect that HP board members and leaders might resign if the Compaq deal is voted down.

"If there is an adverse vote here, it is going to present some significant conflict within each director," Ginn said.

Both said they couldn't say for sure if they themselves would leave.

"If we leave the board, we want to make sure there is continuity," Ginn said. "Being a director of HP, I have a serious fiduciary duty. I won't walk away and pout. If I decide to leave, I will make sure I have a proper replacement."

But one source close to the company said that some directors who previously talked of leaving the board should the deal be voted down began to reconsider. They were reacting to Walter Hewlett's recommendation that HP spin off its printing and imaging business if the merger fails.

The directors "started talking among themselves after Walter proposed the spin off, and the sentiment started to shift," the source said. "There was a feeling that how could (the directors) walk away and let Walter do that to the company? The printer business had to be retained, otherwise it would destroy the value of the PC business."

After HP spun off Agilent, its test and measurement business, in 1999, the company had considered spinning off its lucrative printing and imaging business to unlock shareholder value. But ultimately, the board rejected the idea, since it would not help HP's efforts to become a one-stop shop for its corporate customers.

Condit said that with the directors focusing on this corporate "solutions" concept and on the Compaq merger as an essential part of the plan, no other alternatives have been examined as a backup plan to a failed merger.

"If the vote is no, we'll have to regroup and think our way through it," Condit said.

Condit's and Ginn's comments came after dissident board member Walter Hewlett said he is growing more confident the deal will be voted down.

Members of the Hewlett and Packard families and several family foundations have announced their plans to vote a combined 18 percent stake against the deal, which requires the approval of a majority of shareholders. HP needs to win a majority of votes cast at the March 19 shareholder meeting to garner approval of the merger.

While individual board members have made strong written statements about their position on the deal, Walter Hewlett and others are increasingly taking their case directly to the media as the deal enters the home stretch. They join a growing number of large shareholders speaking out on the merger, including pension fund Calpers, which came out against the deal Friday.

In addition to the telephone briefing from Ginn and Condit, HP touted in a shareholder letter Monday the recent endorsement of the deal by Institutional Shareholder Services, a key adviser to money managers and mutual funds.

And in a separate letter to shareholders, director Richard Hackborn reminisced about the launch of the first HP laser printer in 1984 and what a dramatic change it represented, much as the Compaq deal does today.

"Concerns were expressed that we were not making a contribution, because we were totally dependent on an outside company to manufacture the printer," Hackborn said in the letter. "Others were worried about the business model, because it was one they had never seen before. Through it all, Bill (Hewlett) and Dave (Packard) would listen patiently, smile, nod and then encourage us to proceed full-steam ahead."

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